4 investing moves as China shuffles leaders

ChrisOliver

HONG KONG (MarketWatch) — If you’re investing in China or plan to, you’ll need to keep an eye out for policy changes, as a new generation of leaders takes the helm of the country.

Many analysts believe China is nearing a pivotal moment where the path it chooses could have big consequences for investors.

Among the challenges is to overcome the “middle-income trap” — a situation in which annual wages per worker tend to flatten out in the $1,000 to $12,000 bracket.

It often afflicts economies that remain addicted to selling cheap exports instead of moving up to the production of higher-value goods. For example, while South Korea is now counted among the developed economies, it once faced its own middle income trap.

In a mostly optimistic view on challenges ahead, Citigroup said investors should look for signs of improvement in the way China invests capital, makes use of its natural resources and introduces changes to bolster worker efficiency.

Chances are that China’s incoming leaders will take a gradualist approach to structural reforms, in what amounts to a middle-of-the-road strategy which Citi said will likely work nonetheless.

Here are four themes to watch as China lays out its plans for the next decade.

Health care

Citigroup said health care ranks among its favored investment themes, assuming China’s leaders continue along the path toward a more market-based economy.

President Hu Jintao’s opening speech to the Party Congress on Thursday even hinted at changes which could include rural migrants getting accelerated urban residency permits, enabling them to access local clinics and hospitals.

China uses a system in which each person has a household registration, called a “hukou”, which sets out where they reside.

Sometimes regarded as China’s internal passport, the hukou system means that China’s huge migrant labor force often has no rights to access state-allocated services where they work, even though they may have been living and working for years in the industrial zones that cluster around Chinese cities.

One reason an estimated 20 million workers laid off from their factory jobs during the global crisis then flocked back to their home villages is because they lacked the permits that would have enabled them to stay.

Citi named Hong Kong-listed Sinopharm Group Co.
1099, +1.10%SHTDY, -3.85%
as among companies in the sector that offer good value.

Real estate

Jun Ma, economist at Deutsche Bank, said President Hu’s remarks on Thursday appeared to focus on urbanization as a key goal in the country’s drive to modernize over the coming years.

By identifying China’s continued transformation to an urban-based population from what until recently had been an rural-based one, Hu had essentially spelled out “the main source of growth for the coming decade,” according to Ma.

It also means that more policies to foster the shift towards urban living could be expected, he said.

Millions of rural migrants heading for the city each year add up to a huge demand for housing. Real-estate developers with strong balance sheets are one idea for investors, according to Citigroup, which also flagged the property sector as a potential beneficiary of coming policy reforms.

Last month, Deutsche Bank analysts highlighted China Resources Land Ltd.
1109, -1.22%CRBJF, +0.00%
as among its own picks. The German bank’s analysts cited strong rental income and brisk apartment sales in the first three quarter as reasons for its upbeat view.

Urban infrastructure

Deutsche Bank’s Ma said the policy emphasis on cities, as laid out in Hu’s speech, was good news for urban-infrastructure development, auguring well for companies that make and operate subways and railway lines.

The state-controlled company, which is also listed in Hong Kong, ranks among the world’s top manufacturers of electric-powered trains.

The Hong Kong-government affiliated MTR Corp.
0066, -1.26%MTRJF, +23.67%
could be another way to play the theme, with the publicly listed light-rail operator recently announcing its 49%-owned affiliate company in Beijing had signed an agreement with local authorities to build and operate a new subway for 30 years.

UBS said it kept its “neutral” recommendation on the stock following the news, although it also lifted the share-price target by a small margin to $31.90 Hong Kong dollars ($4.12).

Utilities

Analysts at Royal Bank of Scotland said recently that China should eliminate subsidies to industry by raising prices for water, electricity and energy.

The move, according to researchers, would encourage industry to focus more on higher-value production and help put China on the right track for development of its strategic industries.

It would also be good news for companies such as China Petroleum & Chemical Corp., or Sinopec,
0386, +0.77%SNP, -0.86%
which faces a mismatch between the price of oil purchased on international markets and what it can change end-users at the pump.

Other analysts have highlighted water companies as a long term investment theme that will benefit from the shift to market-based pricing.

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